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Shopify chief executive officer Tobi Lutke is seen outside the New York Stock Exchange.

Michael Falco for The Globe and Mail

Shopify grows up

To outside observers and even many who worked there, the Ottawa company was a roaring success. But CEO Tobi Lutke saw signs of complacency – and issued a call to arms to 'avoid being yet another BlackBerry/Nortel.' Sean Silcoff goes inside a rising tech star's push to join the mobile revolution

Tobi Lutke had run out of patience. As the chief executive of Shopify Inc. walked into his office on Aug. 12, 2015, he knew he had to drive home a message that his staff had been ignoring for too long, so he sat down to write something that would scare them.

"There is no way to sugar coat it. Shopify doesn't get mobile yet," he typed in a characteristically direct e-mail. "I've been doing a lot of pushing on mobile, but I just can't seem to make enough of a difference due to the magnitude of the change needed.

"There is no way for me to overstate this. If we want to avoid being yet another BlackBerry/Nortel, we have to build mobile into our DNA." He sent the message to all employees at 11:16 a.m.

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It's hard to overstate the significance of that e-mail. To outside observers the Ottawa software firm was a runaway success. Three months earlier, Shopify – whose digital platform is used by online merchants internationally to run their Web stores and manage a range of back-office processes – had gone public in a $151-million (U.S.) offering, establishing it as Canada's most promising tech firm on the global stage since BlackBerry Ltd. The company had just issued strong results and was steadily adding customers and employees.

"We as outsiders probably couldn't see that [mobile] … was a top priority that needed to be resolved at all expense," said Citi Research analyst Kenneth Wong.

But Mr. Lutke was worried, with reason: The business of Shopify merchants was quickly shifting away from conventional computers. By early 2016, more than half of total order volume through Shopify merchants would come from smartphones.

Other Web companies such as Facebook had already completed their shift into "mobile-first" businesses. Meanwhile, Shopify's mobile app was dated and served as an accessory to its main desktop offering, with limited functionality.

Mr. Lutke had been pressing the point internally to little avail. "I saw people in the company say things like, 'Hey, we are really good at mobile because all of the traffic we are getting is from mobile phones,'" he said in an interview. "I can see how someone would make that mistake: That's not us being mobile – that's our customers being mobile."

Customers were starting to notice. Average user ratings for Shopify's Android app in the Google Play store had slipped from 4.2 out of five in January, 2015, to less that 3.7 that June and would dip further to 3.1 the following May. "I didn't use [Shopify's mobile app] that much" because it wasn't user-friendly or useful, said Liza Anongchanya, owner of San Francisco-based jewellery business Azil Boutique, which uses Shopify for its e-commerce site.

What Shopify did next to fix its mobile problem – revealed in several interviews with The Globe and Mail – offers important insights to anyone hoping for a Canadian tech-sector renaissance. At a time when "innovation" is a top buzzword among politicians, innovative companies continue to face long odds in a business where creative destruction is an occupational hazard and, as Intel co-founder Andy Grove famously said, only the paranoid survive. Launching a startup is daunting, scaling it up is difficult and going public is rare.

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Having passed those milestones, the stakes were only increasing for Shopify. "This decision basically sets us up for success for the next five years," chief marketing officer Craig Miller said. "If [we] get this wrong, we're screwed."

Mr. Lutke, seen in 2013.

Dave Chan for The Globe and Mail

Shopify started in 2004 as an online snowboard retailer powered by software that Mr. Lutke, a German immigrant, built because he was dissatisfied with the quality of existing programs for e-commerce merchants. His software worked so well, the company ditched the snowboard store and instead began charging other online merchants for monthly access to its cloud-based, e-commerce platform. Eventually, Shopify expanded its platform so retailers could use it to sell their wares and handle processes such as inventory management.

Shopify was perfectly positioned to serve a new wave of retailers, who, thanks to an array of new, inexpensive cloud-based software, could start online businesses for a fraction of previous costs.

The company's success in attracting customers with a product rivalling the best Silicon Valley could offer impressed venture capitalists, including early Boston-based backer Bessemer Venture Partners; between 2010 and 2013 the company raised $122 million in venture backing as sales continued to rise sharply.

The company now has more than 325,000 customers, up twofold in 18 months, ranging from Kickstarter-funded first-time merchants to celebrity entrepreneurs such as Ellen DeGeneres and corporate giant Nestlé SA, and is "not anywhere near the saturation point," Canaccord Genuity analyst Richard Davis said. When market rumours recently surfaced that Google wanted to buy Shopify, chief operating officer Harley Finkelstein retorted that maybe Shopify could instead buy Google some day. (A dual-class share structure shields Shopify from unwanted hostile bids.)

Shopify employees at the company’s Toronto office in 2015.

Kevin Van Paassen/Bloomberg

Despite Shopify's rising-star status, Mr. Lutke began worrying about Shopify's weakness in mobile in mid-2014, when data showed for the first time that half of the traffic to its merchants' sites was coming from smartphones and tablets.

Shopify had actually been a relatively early mobile adopter. It launched an app for Apple's iOS platform in 2010 and bought mobile software developer Select Start Studios in 2012 to expand its mobile offerings, including a point-of-sale app that merchants could use on tablets in physical stores.

But Shopify's mobile app was little more than a companion to its main product, developed in the belief the platform was too complex to be used on small screens. Separate teams developed the apps for Apple and Android mobile systems. That meant there were three versions of Shopify, but only one that could fully handle customer needs. "It wasn't part of our DNA to focus on mobile," said Christopher Lobay, Shopify's director of product.

Mr. Lutke realized his company had a blind spot. In North America, office workers were accustomed to "incredibly high-quality" computers, he said. "This significantly coloured our idea of what computing is."

From the archives Back in 2014, Report on Business magazine named Tobi Lutke its CEO of the year. Read our pre-IPO profile of Shopify's leader.

Meanwhile, entrepreneurs in developing countries were moving straight to smartphones that delivered all the computing power and functions they needed. "They're much better equipped [in Asia] to understand how transformative cellphones are … I don't think North America is nearly as innovative a place as people think."

That meant mobile-only users in the developing world were now the technology trend-setters that users in Shopify's core markets would be following.

"We were growing product teams into merchant services, like taxes and reporting, and we weren't thinking, 'Well, how does this scale on mobile devices?'" Mr. Lobay said. "The product vision … never quite captured the essence of what Shopify actually was for most of our merchants."

The eloquent and soft-spoken Mr. Lutke was chagrined. He had correctly anticipated other technology trends, but "given that I pride myself at being reasonably good at this, how did I miss mobile in such a profound way?" he said candidly.

Mr. Lutke started using his smartphone almost exclusively to acclimatize himself to a mobile-first world; he initially found it difficult, but adapted. He told a staff town hall meeting in November, 2014, the company needed to get serious about mobile and repeated the message at another employee event. But when product managers subsequently presented mockups of new applications, few were shown in mobile form. "It was usually me asking, 'Hey, so what does it look like on mobile?'"Mr. Lutke recalled.

Shopify was suffering from its own success. In earlier days, "a hero usually emerged" to tackle the company's latest issue, Mr. Lutke said. Once, an employee pulled an all-nighter on his own accord to fix a problem with the company blog. That was a function of Shopify's open and entrepreneurial culture, reinforced by weekly "Ask Me Anything" sessions with the CEO and quarterly "Hack Days," where employees pursued projects of their choosing, often resulting in the creation of new Shopify features.

But Shopify's rapid expansion – it has 1,750 employees, up from 131 four years ago – created challenges. With so many employees, the CEO's warnings about mobile succumbed to the "bystander effect," a behavioural phenomenon where individuals in large crowds don't help a victim because they assume others will. "There was a wide acknowledgment that mobile was a problem, but then I think everyone said, 'Yes, it's a problem,' but went back to doing what they always do," Mr. Lobay said.

Months passed. Then, in August, 2015, an employee casually remarked to Mr. Lutke that the Shopify mobile app had been downloaded from app stores 70,000 times the previous month, adding it was probably because people thought they could start a Shopify store from their smartphones. They couldn't. Instead, new users who opened the app were asked for their login and password. There was no mention about how to sign up.

"We didn't support that. And no one thought about supporting it," Mr. Lutke said ruefully. "It never occurred to us to even put a 'Sign Up Now' button inside the app. We didn't realize that the world has changed in such a profound way that people who want to install this are not going to Google and a website any more, they're going to an app store. And we were as unhelpful as humanly possible by not even acknowledging they might want to start something right there. That just made me upset and sad at the same time."

He immediately walked into his office and banged out his call-to-arms e-mail. "I thought, 'I might regret this, but this is extremely important for me to say right now,'" Mr. Lutke said. In the e-mail, he encouraged everyone to build Web apps during the next Hack Days that month.

This time, the company responded. Two weeks after Mr. Lutke's e-mail, every project that emerged from Hack Days was mobile-related. "You can imagine that an e-mail from a CEO that says 'If we don't get this right we're going to be the next Nortel' has the intended effect," said Mr. Miller, the chief marketing officer.

Across Shopify, employees started using their smartphones instead of computers. The company installed several mobile testing stations so employees could try out features on a range of phones.

Within days of his e-mail, Mr. Lutke gathered team leads from engineering, product, design, customer support and user experience to begin scoping out how to fix Shopify's mobile app. The group quickly decided to scrap the existing software and start over, using React Native, an open-source code developed by Facebook.

They also decided the mobile app should be so comprehensive merchants could rely on it exclusively and "eventually never need to their computers to use Shopify," Mr. Miller said. That meant merchants needed to be able to perform all key tasks – manage inventory, update product descriptions, review and fulfill orders and communicate with employees and customers – from their palms.

Rethinking Shopify as a mobile-first experience presented some opportunities. A tool enabling merchants to interact with staff and customers was a natural fit given the popularity of mobile instant messaging. So was the ability to take and upload product pictures.

Everything would be managed from a home screen in the app, where users could easily swipe in and out of tabs with real-time data from their business, handle orders and access their product catalogue. In addition, if Shopify's algorithms detected a trend – such as a drop in orders for a particular product – it would automatically generate editorial content offering customized tips such as buying more online ads. That would pop up on the user's home screen.

By late fall, the group realized React Native had serious shortcomings: For example, every time users rotated Android phones from portrait to landscape, the app restarted. Two months of development work was scrapped. Instead, they used another open-source language developed by Facebook called GraphQL that worked better.

A core team of six to eight mobile programmers and several interns worked first to complete the most difficult job: building the order management process. They continuously updated the mobile app-in-progress, making it available for everyone in the company to try out so they could offer feedback.

By early 2016, however, Mr. Miller was starting to worry that while engineers were doing "a lot of good technical exploration, it wasn't being turned into a product merchants were going to use." He feared development could stretch into years while Shopify's existing mobile app grew more out of date and frustrated merchants started to leave. "I just got so frustrated and said, 'This can't happen,'" Mr. Miller said.

Room to grow

E-commerce software platform seller Shopify Inc. has increased revenue more than 16-fold since 2012, and analysts say there is plenty more growth ahead.

The Ottawa company had 325,000 merchants using its platform as of Sept. 30, out of an estimated potential market of 10 million merchants in its core markets of the U.S., U.K., Canada and Australia. The company has forecast it will nearly double revenue this year, to $380-million (U.S.). Analysts on average anticipate revenue to exceed $560-million in 2017, according to Bloomberg.

In addition, the value of merchandise moved through the Shopify platform is growing fast, but still represents a drop in the global bucket: Shopify merchants handled $9.8-billion in gross merchandise value (U.S.) in the first nine months of 2016 and is on track to reach about $14-billion for 2016. That’s less than 1 per cent of the estimated $1.9-trillion in global retail e-commerce sales that research firm eMarketer estimates will happen this year. By comparison, Amazon.com generated $107-billion (U.S.) in net sales last year.

E-commerce remains a solid long-term growth story: eMarketer forecasts global e-commerce sales will rise faster than overall retail sales through 2020, giving e-commerce a 14.6-per-cent slice of total retail spending by 2020, up from 8.7 this year. At that rate, e-commerce sales would top $4-trillion in 2020. Meanwhile, Toronto-based e-commerce market data firm Vantage Analytics Inc. says online orders during the recent U.S. Thanksgiving holiday weekend were up 77 per cent over the same period in 2015.

Canada remains an e-commerce laggard, with online sales accounting for just 5.7 per cent of total retail sales, eMarketer says. Nonetheless, it expects Canadian online sales to rise to $50-billion (Canadian) in 2019, compared with $25.4-billion in 2014.

It hadn't been enough for the CEO to shock the troops into action with his alarming by e-mail. Mr. Lutke had to put somebody in charge, and Mr. Miller, who been a senior executive with eBay's Kijiji business before joining Shopify in 2011, offered himself up in early February. "I said, I'm going to sign up, Chris [Lobay, a direct report] is going to sign up, he's going to get a team that's going to sign up, we're going to start solving these problems and change that direction in the company," Mr. Miller said.

"He was completely right" that someone needed to have sole accountability, Mr. Lutke said. "It seems silly that I didn't spot that myself."

Emboldened by the team's progress, senior product manager Carson Brown set a goal in early spring to ship the app by September so merchants would be ready for the surge of Black Friday/Cyber Monday traffic. "When I first heard September I said, 'Which year?' I didn't believe they could do it," Mr. Miller said. But they all knew that if Shopify missed the busy U.S. Thanksgiving season, it might as well wait a year.

Work continued into summer, but with six weeks left to deadline, the 20-person development team realized they wouldn't get everything done on time. They began to trim the project's scope, determining what features could be completed on time and which would have to be deferred.

The team decided it could wait to add a sign-up function to the app: Without that feature, whose absence had prompted Mr. Lutke's blistering e-mail, Shopify couldn't truly call itself a mobile-first company. "I accepted that at least our existing merchants would have a much better app during Black Friday and we would get the feature done shortly afterward," Mr. Lutke said.

But engineering director Tom Burns was determined to complete the task and worked much of a mid-September weekend to do so. New customers would be able start a Shopify store on their phones after all. "There was some clear heroism at the end," Mr. Lutke said.

Shopify finished the app and uploaded it to the Apple and Google stores on Sept. 27, just 13 months after Mr. Lutke's e-mail. It was an immediate success; the number of Shopify merchants who use the app on a daily basis – now 66,785 – shot up by 45.5 per cent between the two-week period before launch and the last two weeks of November. Close to one-third of all Shopify merchants now use the app monthly, up almost four percentage points since launch.

"It's great. Now I can do everything on my own without contacting my staff," said Ms. Anongchanya, the San Francisco jewellery merchant. "It's perfect for someone like me who's on the go."

"We will get to a point where we have merchants all over the world that don't realize there's a Web version of Shopify," Mr. Miller said.

Mr. Lutke is pleased. "We are in the right place. Finally. In this case, we prevailed and we did it right – at least, I'm pretty sure we did."

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